$100 of Cash and Enterprise Value

Question the Other Day:

If a CEO of a company picks up $100 of cash on the
ground and puts it in the companys bank account,
what happens to the companys Enterprise Value?
(In other words, does it increase, decrease, or stay
the same?)

$100 of Cash and Enterprise Value

ANSWER: Enterprise Value stays the same!
Most common follow-up question:
But wait, you subtract cash in the Enterprise Value
calculation. How can Enterprise Value possibly stay
the same?
Formula: Equity Value + Debt Cash + NCI +
Preferred + Unfunded Pensions Other Investments

What Does Enterprise Value Mean?

Thats how you calculate Enterprise Value, but its not
what it means
Meaning: Enterprise Value represents the value of a
companys core business operations to ALL the
investors in the company
Equity Value: Represents value of everything, but only
to the Equity Investors

Implications of This Definition:

So when you calculate Enterprise Value, starting with
Equity Value
Add Items When: They represent other investors (Debt
investors, Preferred Stock investors, etc.) or long-term
funding sources (Capital Leases, Unfunded Pensions)
Subtract Items When: They are not related to the
companys core business operations (side activities,
cash or excess cash, investments, real estate, etc.)

Back to the $100 in Cash

Is it part of the companys core business?
No! Does not make the core business more valuable
But it is part of the everything the company has
Equity Value: Increases; Cash: Increases
Enterprise Value: The same! One part up, one down

About Equity Value

Why does Equity Value increase as cash increases?
Because: Equity Value should implicitly reflect the
companys cash balance already
If a company has $500 in cash, would it make any
sense for all its shares to be worth less than $500?
No! Should always be worth at least its cash on-hand

One Other Way to Think About This

Common Analogy: Buying a house, and Enterprise
Value represents the total value of the house
House: $500K, with 50% mortgage and 50% down
payment
Mortgage = $250K

Equity = $250K
Total = $500K

One Other Way to Think About This

House: $500K, with 80% mortgage and 20% down
payment

Mortgage = $400K

Equity = $100K
Total = $500K

One Other Way to Think About This

House: $500K, with 0% mortgage and 100% down
payment

Mortgage = $0

Equity = $500K
Total = $500K

Question for You:

What if you and the owner find an extra room? What
happens to the homes price?
Answer: Total Value goes up House is now worth
more; just like Enterprise Value increasing
But what happens if you find some extra supplies or
gardening tools that youre going to sell anyway?

Extra Tools / Supplies:

Answer: NOT core to the homes value
Yes, the upfront price may increase but youll sell
them and get the cash back anyway! No changes!
So the homes Enterprise Value stays the same
Just like what happens when the CEO picks up $100
of cash on the ground

Moral of the Story:

What happens to Enterprise Value when X or Y
changes?
Dont think about the formula for Enterprise Value!
Instead: Think about whether or not that change is
related to the companys core business operations
Test: Will it affect revenue or EBITDA?

Moral of the Story:

Core Business Value Changes: Enterprise Value will
change in some way
Core Business Value Does Not Change: Enterprise
Value stays the same
Other Examples: Cash, Debt, Preferred Stock, Share
Count None of these should impact Enterprise Value